War, what is it good for? Bull runs on stocks

Peter Spence is an independent researcher and writer. He is a former Online Writer at City A.M.

Follow Peter

Peter Spence

THE CHANCE of war this May is a signal to buy stocks, according to a note from Bank of America Merrill Lynch.

Stocks have historically declined in the run-up to conflicts, but then “rally hard once war commences”.

Michael Hartnett, chief investment strategist at BAML, points to World War II stock movements to make his point.

The chart below is a “classic example”, says Hartnett, as German stocks dropped during the years before the invasion of Poland, and then soared upon Britain’s declaration of war.

While stock markets have been negatively affected by the tensions over the Russia-Ukraine situation so far, the research suggests that it could be an opportune moment to invest

Analysts at BAML highlight an academic paper on what looks to be a paradox. The authors find that the puzzle “cannot be explained by risk or ambiguity aversion, or by expectations about a quick end of the war”.

They note that the pattern has long been understood. “Buy on the sound of the cannon, sell on the sound of the trumpet” is a proverb as old as the Napoleonic wars, and attributed to 19th century London financier Nathan Rothschild.

“Investors tend to overreact to the bad news of a coming war, leading to underpricing, and that they similarly overreact to the good news of the end of a war, leading to overpricing,” say the authors.